Income Tax for NRI in India

The taxation system in India is a vital constituent for the nation’s economy. The tax department levies several taxes on the services and products that are availed by the citizens of India. These taxes intend to add better shade to the products and services used by the consumers. Taxes including Income Tax, Property Tax, Service Tax, and tax deducted at the source are the most common form of taxation. These are the most familiar taxes for the people living in India. However, here a question arises, ‘How taxation in India have an effect on the non-resident Indians (NRIs)?’

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NRIs also have to make payment of appropriate and applicable taxes whenever they are covered under the Income Tax Act, 1961. NRI taxation deals in all the details about the taxes for an NRI and how they must deal with taxes. The NRI taxation system covers all the aspects of property tax, wealth tax and income tax.

NRI Taxation System in India:

It is important to understand how an NRI becomes accountable to make payment of tax in India. As per Foreign Exchange Management Act (FEMA)’s definition, a civilian of origin of India can be referred to as NRI only if s/he spends a certain number of days abroad and subsequently, a comparative period of absence is maintained in India.

By default, an income that an NRI earns abroad is exempted from tax in India. However, if the earnings in India via sources like mutual funds, term deposits, capital gains from the investment in shares, and property rental exceeding the fundamental limit as mentioned in the IT Act, 1961, an NRI will have to file an income tax return.

Taking the imposed taxation on the NRI’s income into consideration via sources in India, TDS is charged at the maximum rate on interest produced on the capital gains earned from term deposits, mutual funds and shares. Most often this cancels out the need to file a tax return. However, on the other hand, it might also occur that the overall TDS does not include the NRI’s basic tax liability. This makes the filing of returns the only method to file a claim for tax refunds.

NRI Taxation Rules:

Rules of taxation in India for an NRI vary by a considerable degree while comparing to the rules, which are applicable for the residents of India. A few important points to remember are:

  • Tax slabs for NRIs depend only on the earnings barring age, gender or another requirement.
  • For TDS, all the earnings of NRIs are levied heedless of threshold value.
  • Tax filing is not usually needed for an NRI, if his/her income is liable to clauses u/s 115G of the IT Act 1961.
  • No economical deductions are pertinent to investment incomes except under certain conditions.

The Income Tax Act, 1961 includes special provisions under the sections mentioned below:

Section 115D - Calculation of Tax:

  • This section does not allow the investment income calculation of an NRI.
  • In case the assessee is a non-resident Indian –

No tax deduction is permitted on the gross total income, which includes the only earnings from long-term capital gains and investment.

If the income from long-term capital gains and investment form only a portion of the gross total income, this kind of income will be deducted and the rest of the amount might qualify to avail tax deductions under the Chapter VI-A.

Tax levied on Income from the Long-term Capital Gains and Investment (Section 115E):

If the overall income of NRI includes the following:

  • Income from long-term capital gains
  • Earnings from long-term capital gains or investments of any asset apart from an Indian Company, or debentures issued by or the deposits with any non-private Indian firm, any Central Government security or the assets further mentioned by the Government of India.

Then the payable tax by the non-resident Indian will be the total of –

Tax calculated at the interest rate of 20 percent on the income from investment as specified in 2(a).

Tax computed at the rate of interest of 10 percent on long-term capital gains as specified in 2(b).

The tax levied if both clauses, i.e. 2(a) and 2(b) has been deducted from the aggregate income.

Non-chargeable capital gains on the transfer of the foreign exchange assets in some cases (Section 115F) – This, generally, involves the exclusions where the foreign exchange asset transfer won’t incur any sort of tax.

If the non-resident Indian invests a portion of whole of the profits of capital gains from foreign exchange asset transfer into assets mentioned by the Government of India within a tenure of 6 months and the acquisition cost of new assets is equal to the earlier asset value like capital gains, won’t be levied.

If an asset of foreign exchange is converted or transferred into money within a period of 3 years from the acquisition date, capital gain not levied from the transfer of asset depending on the cost of the new asset will be a taxable income.

Non-filing returns of Income in certain cases (Section 115G):

  • In case the total income during the preceding year is only via earnings from the long-term capital gains and/or investments.
  • Tax deduction at Source (TDS) has been subtracted from the aforementioned income.

Advantages of Taxation after the NRI becomes resident (Section 115H):

This means in case the person was NRI in the preceding year and becomes the resident in any following year that makes him able to be gauged differently under the tax laws, the return of income from the investment on the assets of foreign exchange are required to be declared. This will permit the taxation provisions to remain unbroken until the assets are converted into any monetary amount.

Provisions’ non-application for the NRI Taxation (Section 115I):

This rule is not included in which the NRI can pick ifs/he wants his/her earnings to be taken into consideration from the capital gains or investments. If an individual opts not to, then all the earnings from various sources in India are deemed taxable.

All the aforementioned rules are liable to change as per the direction and discretion of the Income Tax Department of India and the Central Indian Government.

NRIs – Tax Exemptions:

The types of income, which are tax exempted, are mentioned below:

  • Interest produced on FCNR/NRE accounts
  • Interest earned on the Government issued notified bonds and savings certificates.
  • Long-term capital gains from the listed equity-oriented mutual funds and equity shares.
  • Dividends earned from the shares of domestic companies of India.
  • Capital gains are exempted via Sections 54, 54F, and 54EC.

All the aforementioned exemptions are liable to tax laws that are prevailing at that time.

Comprehensive Picture of the NRI Taxation:

It is important to understand whether the individual is referred to as an NRI in accordance with the guidelines introduced by the Foreign Exchange Management Act (FEMA). After that, the aforementioned deductions and exemptions are to be taken into consideration so that the individual have made payment of excess tax in any situation. The Non-resident Indians cannot make use of forms 15G and 15H to ignore TDS so that the TDS exceed the liability of tax, they will require filing ITR together with the proof of investments and earnings so as to avail the tax refund.

Income Tax for NRI in India FAQs

  • Who is considered an NRI?

    Non-Resident Individuals (NRI) can be a citizen of India, Persons of Indian Origin (PIO), or someone who is not currently an Indian resident.  
    An individual is considered an NRI if:
    • They are in India for 182 or more days during the previous year.
    • They are in India for 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.
    You must note that even if you become an NRI, you still have to pay taxes on the income earned in India.
  • Do NRIs have to pay tax on their entire income?

    NRIs do not have to pay tax on their entire income, rather just the income earned in India through all legal means. The taxable income also includes capital gains. You can refer to section 115 to know the details.  
  • What are the deductions allowed for NRIs?

    NRIs can claim deductions for the following aspects:
    • Standard deduction of 30%
    • Property tax deduction
    • Principal amount deduction of home loan under section 80C
    • Registration and stamp duty charges paid for a property
  • Can an income tax refund be credited to my NRO account?

    Yes. NRIs can receive tax refunds up to Rs 10,000 in a financial year. However, the amount is subject to TDS deductions. The net amount is further credited to the NRO account if it is active.
  • What are different NRI accounts in India?

    Different types of NRI accounts in India are:
    • NRE account (Non-Resident External)
    • NRO account (Non-Resident Ordinary)
    • FCNR account (Foreign Currency Non-Resident)

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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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